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Another fine mess: a Clean Air Act case demonstrates the cost of regulatory uncertainty

Late last month, in Wildearth Guardians v. Lamar Utilities Board, Judge David Ebel ruled that Lamar violated the Clean Air Act by not obtaining a MACT determination, given that its potential emissions of hydrochloric acid were 10.3 tons per year, above the 10 tpy limit for any single hazardous air pollutant. The decision provides an abject lesson on the costs imposed by regulatory uncertainty.

The facts, in bullet form, are as follows:

In 2000, EPA determined that coal- and oil-fired electric generating units would be subject to MACT.

In 2004, Lamar decided to upgrade an existing small natural gas-fired EGU and convert it to coal (and if Lamar hasn’t already been punished enough by the market for that decision, then you haven’t been following the relative prices of coal and natural gas!).

In 2006, Colorado approved the project. Because EGUs had been delisted, Colorado did not require that Lamar obtain a MACT determination as part of the permit. Lamar began construction.

In 2008, the delisting rule was overturned, in New Jersey v. EPA, thus putting EGUs back into the MACT universe.

In 2009, EPA contacted Lamar and instructed it to obtain a MACT determination. Lamar, rather than seeking a MACT determination, concluded that its HCl emissions would be below 10 tpy, and sought a synthetic minor permit from Colorado, limiting emissions below 10 tpy and thus exempting it from MACT.

In December 2009, Wildearth Guardians sued Lamar for constructing the upgrade without a MACT determination.

In 2012, Colorado issued a modified permit, limiting HCl emissions to 8 tpy and exempting the project from MACT

The court was forced to decide whether, under these circumstances, Lamar violated the CAA MACT requirements. The answer was yes. Basically, the court concluded that, from and after the mandate in New Jersey v. EPA vacating the delisting rule, and until the synthetic minor permit was issued in 2012, Lamar violated the Clean Air Act. While Lamar argued that its original estimate of 10.5 tpy was conservative, and was done at a time when no MACT permit was required, the court found that this figure still represented Lamar’s formal position regarding its potential to emit.

Fortunately for Lamar, the court denied Wildearth Guardian’s request that the synthetic minor permit be invalidated, under EPA’s “once in, always in” policy, which provides that, once an EGU has been found subject to MACT, the determination cannot be revisited. The court decided that application of the policy would not make sense on the particular facts here (which included a statement from EPA suggesting that it should not apply). Consider that a small victory for common sense. The court also both denied an injunction and made clear that the penalty determination would have to reflect the unique facts of the case. I don’t anticipate any significant penalty to be imposed against Lamar.

One simple lesson for generators emerges from the case – and it’s one that EPA probably won’t like. Never be overly conservative in one’s emissions estimates. You never know how conservative numbers might come back to haunt you.

The bigger lesson of course is the cost of this regulatory ping-pong. I understand that the Bush delisting rule was extreme and that, whatever its merits as policy, it was always on very weak legal footing. However, that’s little comfort to the EGUs caught in the ramifications of the multiple changes in EPA’s implementation of the CAA’s MACT requirements. More broadly, even if Lamar's penalty turns out to be small, the penalty itself doesn't even scratch the surface of the costs imposed by this type of uncertainty. How can regulated entities possibly make rational investment decisions when regulatory requirements can change at the drop of a hat, or a decision by a judge, or a change in administration?

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